Urban Water Supply

The role of microloans in improving water supply

In Ethiopia, the hurdle in water supply for many people is the high initial cost of a dedicated household water connection. The householder has to pay the cost of laying a pipe from the mains to the house; the greater the distance of the house from the water main, the higher the cost. Poor households have no capital budget or easy access to credit or loan services to invest in a tap for their exclusive use. This challenge forces such households to buy water from water kiosks and public standpipes at prices much higher than the price of water sold directly to households. Such an additional burden on poor households contributes to their cycle of poverty.

Many people in this group cannot access loans from banks because of their low income. One way out of this is to make microloans available to them. Microloans are small amounts of money lent at a low interest rate to people on low incomes. The idea emerged from the Grameen Bank in Bangladesh in 1976. Because the borrowers, being poor, did not have guarantees, ‘solidarity groups’ of five borrowers who could vouch for each other’s loans were created. This was possible in rural or village settings where all the borrowers knew each other. This fact also created peer pressure to repay the loan, with the result that the repayment rate for loans at the Grameen Bank is greater than 90% (Fonseca, 2006). The microloan system enables low-income households to obtain their own water supply at a reasonable cost. Once they have their own taps, households will need to spend less on water, and the savings made can be used towards other needs of the household, such as health and education.

Microloans can also be made to a community, say, to finance the drilling of a well. A loan such as this engenders ownership of the asset (the well, in this example), and usually results in greater care and responsibility. This bodes well for the sustainability of the asset.